Last week got off to a quiet start as the markets waited for Federal Reserve Chairman Alan Greenspan's semiannual testimony to Congress on monetary policy. Buyers - real money, overseas and fast money - emerged Wednesday, however, as the Treasury market sold off on his comments which contained nothing that would suggest a change in the Fed's current course of action. Greenspan's statement - that the decline in longer-term rates as the FOMC began its measured rate hikes was a "conundrum" - affected the long end. The 10-year Treasury yield backed up to the middle of its trading range by Wednesday evening, which took the pressure off refinancing and convexity risks.
With the 10-year Treasury yield back to the middle of its range, it would appear mortgages are back to their steady grind tighter mode as the sector benefits from low volatility, limited supply, good demand, and limited opportunities in competing sectors. Mortgages are expected to continue to hold firm if rates hold steady or increase modestly. Any moves towards 4% Treasury yield will likely be met with profit-taking and sidelined investors on fears of increased volatility, higher supply, refi and convexity risks.
Originators were heavy sellers on Monday, dumping over $2 billion; however, they dropped off to below $1 billion per day on Tuesday and Wednesday. Given the previous week's decline in mortgage rates to below 5.60%, supply is anticipated to be somewhat higher in the near term. In recent comments from Bear Stearns, analysts noted that the effect of the increased refis from the recent dip might not be seen until March, "leaving some supply in the pipeline in coming months," analysts wrote.
Overall mortgage application activity little changed
Mortgage application activity saw limited response for the week ending Feb. 11 despite the decline in mortgage rates to the lowest since last April. According to the Mortgage Bankers Association, the Purchase Index actually declined 5% to 423, while the Refi Index was up just 4% to 2530. Analysts' expectations had ranged from 2500 to 3000 on the Refi Index. Still, the level of the Refi Index was at its highest since last April.
In comments from Lehman Brothers regarding the prospect of a potential refi wave, analysts suggested that despite similar rate incentives as last April, refinancing volumes are expected to be lower because of burnout in premium coupons and the curve flattening is reducing the appeal of fixed-to-ARM refinancings. As a percentage of total application activity, refinancings rose slightly to 49.9% from 48.9% in the previous report. ARM share, meanwhile, declined to 30.7% from 31.9%.
Mortgage rates revert back
to recent levels
Freddie Mac reported modest increases in both fixed and adjustable mortgage rates for the week ending Feb. 18. The 30-year fixed rate mortgage rate rose to 5.62% from 5.57%; 15-year fixed rates averaged 5.14% versus 5.10% previously; 5/1 hybrid ARM rates rose six basis points to 5.05%; and the one-year ARM rate gained four basis points to 4.15%.
Looking ahead to this week's MBA mortgage application report, expectations are for the Refi
Index to decline as a result of last week's rate increase. JPMorgan Securities anticipates the Refi Index will fall roughly 5% to around 2400 from 2530.
Jump in prepayments
expected in March
Presently, prepayments are expected to be little changed in February for both FNMAs and GNMAs, despite the day-count being 19 days versus 20 in January. Mortgage rates, however, have on average held within a four basis point range over the past three months, while the Refi Index has been on the rise since its traditional holiday malaise - increasing 43% from the end of December. Speeds are predicted to surge in March, in response to the steady to lower mortgage rates, an increase in the day-count to 23 from 19, and improving seasonal factors.
In comments published in February Short-Term Prepayment Estimates, Bear Stearns analysts wrote, "We expect the March report (released the first week of April) to absorb most of the recent pick-up in prepayment activity erasing all of the slowdown observed in the most recent (January) report." Bear analysts added that this would be followed by additional increases in April as continued refi activity would be supported by the seasonal rise in home sales. Bear Stearns also noted that so far this year, there has been no sign that the housing market is losing momentum given that the MBA's Purchase Application Index is currently above the level it was over the same period last year despite the significantly flatter yield curve and higher ARM rates.
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